Wednesday, November 16, 2016

Ah, the fall. A time to reap what has been sown and contemplate the cycles of the seasons.

If you are a smaller game developer, you’ve likely noticed some cyclical shifts in how we make games. Games are looking nicer than ever, don’t they? That quality bar keeps creeping higher. With so much work to do, your team is a bit larger. And with so many mouths to feed, it feels riskier to lose everything experimenting on wacky new game mechanics. Luckily, it is pretty clear which genres will yield the breakout hits you need to keep going. It is too bad that there’s a such an abundance of similar games; it feels like you can’t even give them way.

What changed?

Remember when we had a revolution? One person teams could make original games with minimal content and strike it rich. Doodle Jump was a thing! A hit indie game like Braid cost a minuscule $200k to make. A developer and some lovely art and there was a complete top tier game. Press wrote about it.

But it feels if such games were released today, they’d likely be left to rot in obscurity. A modern hit by a “small” team is a game like Battlerite. 25 developers, lush 3D graphics, external funding. An order of magnitude increase in costs over a period of eight years.

To everything there is a season, and game markets follow predictable patterns of growth, harvest and if you’ve been luckily enough, stockpiling for the coming frost.

Have you been making games for less than 10 years? Are you a newer smaller indie developer who has only ever known the bright fields of opportunity known as Steam, console downloadable or mobile platforms?

Here’s what is coming. Here is what happens when game markets mature.

Memories of spring

Historical context matters.

A new game market opens when a new way of reaching eager players appears. In the early 2000s, digital distribution was a technology that cracked opened an industry previously dominated by retail sales. Apple and Google enabled phones to download games. Microsoft, Sony and Nintendo enabled consoles to download games. And Steam created a cohesive and reliable ecosystem for PC players to download games.

If you don’t remember the retail era it is hard to overstate what a radical change digital distribution was to the dominant business models. In retail, about 15% of revenue went to the developer. The rest goes to marketing, publishing and the retail store itself. This creates a power differential that tends to squeeze creativity out of game developers. Forget tales of wide-eyed idealism. Retail game development was a factory job that churned out games tailored to the whims of a giant box shipping machine. This was a mature market with most major game developers owned art and soul by middlemen publishers or platform owners. AAA still follow this model to a large degree. Good people, bad system.

Two things happened when digital distribution hit. For the first time in ages, we saw high demand and low supply.

High demand: Platform owners pushed their new distribution platforms heavily. A platform much preferred a guaranteed 30% cut of digital, especially when compared to a paltry 0-20% cut of retail. Valve bundled Steam with their top selling games. Microsoft gave away prime real estate on their console dashboard. Apple and Google directed users to go through their storefront in order to do pretty much anything. The result is a torrent of customers flooding through these digital stores wanting to buy cool stuff for their cool new toys. Put a pretty picture and a buy button and bam, you’ve got a sale.

Low supply: But there wasn’t anything to buy. A lot of traditional game publishers didn’t want to risk being beholden to some new platform master. Every digital storefront is essentially a monopoly with the potential to exert absolute dictatorial control. So most publishers held back. A few fringe game developers put up games. These were the hippies and hobos whose niche products never broke into the more mature retail markets.

And their games sold like hotcakes. In large part because there was nothing else to buy. For a while it felt you could put almost anything up on a digital market and turn a profit.

Short hot summer

With digital distribution, anyone with a computer could make a game and release it. And because they kept 70% of the revenue, they needed to sell a lot fewer copies to make ends meet. This means lots of little game companies. Call them ‘indies’.

Most were untrained. They didn’t understand how to run a business. Many had never made a professional game before. So they experimented, often wildly. Bizarro mutants popped up. Journey. Day Z. Tower Defense. What can you do with the internet? Or Flash? Or a touch screen. Or a one person team? Who knows; let’s just try something. Will Wright, gushed about the “Cambrian explosion”. New genres were born. That was 2008.

What a time. I look back on it fondly.

End of the growing season

Low barriers to entry
But low market barriers mean new developers just keep flooding in. And the nature of digital distribution means games never truly expire. So the back catalog of great games grows larger and larger. This is no longer a low supply market.

Fixed demand
Nor is it a high demand market. Consoles are stable. Smart phones (aka phones) are no longer setting growth records. PC sales are dropping. All those digital customers are a known quantity, divvied in zero-sum fashion across the various DRM locked platform fiefdoms.

What happens to a market when demand is fixed and supply is high? Competition. Here’s the traditional logic. The following sequence has played out across thousands of games and dozens of markets.

Standardization: Players form communities around the most popular game types. This creates a standardized demand.

Competition: Developers try to capture the entertainment dollars of these communities by releasing games in the same genre. For example, they might release a MOBA.

Winner takes all: Players gather around one or two high quality, well marketed examples within genre. Those games earn the vast majority of all revenue.

Escalating costs: In order to win that top spot, Developers invest heavily in art, narrative, marketing events and monetization. Maybe you can beat your competition by simply doing more.

Bloat: This results in larger developer team sizes. Larger teams burn more money, leaving less margin for mistakes.

Risk avoidance: A culture of risk avoidance dominates. You must make proven games with proven themes resting on proven mechanics for a proven audience. Layers of decision hierarchy grow to eliminate exuberant impulses. ‘Wasteful’ experimentation is deprioritized. All focus is on servicing the nuanced needs of expert (high value) players in an existing genre.

What success looks like
There are three broadly successful long term strategies for independent developers in this newly competitive market.

Become a genre king: Have a hit game in a popular genre. Invest those profits in ensure that you have the best developers, community and marketing to own that audience. Set the standard that all others hope to achieve. Be what Blizzard was to MMOs. If you pick the right maturing genre, you can gain 10 to 20 years of stability.

Dominate a niche: Find a niche that only appeal to a wealthy but passionate audience. Become hyper efficient at serving that niche. This isn’t so different from being a genre king except no one cares about you. The press barely cover you. The broader population of gamers doesn’t really know you exist. But a small devoted community cares. So you scope your company to the tiny size it needs to be to serve a tiny market. Artemis Spaceship Bridge Simulator or SpiderWeb’s retro RPG games are good examples.

Manage a brand: There are a handful of companies that have a powerful brand they used to secure funding. During hard times, they essentially freeze dry themselves. This minimizes costs until the next deal comes along. Jackbox is the most common game industry example.

False success of having a hit game
There’s a ton of money flowing through a maturing market and occasionally it arcs over to the random indie in the right place at the right time. Zot! A jigawatt of revenue powers them for years(!) without additional income.

But the result is a lesson in exponentials. Ever play one of those new fangled idle games like Cookie Clicker? As markets mature, escalating exponential costs rapidly consume existing savings. For example: A top shelf ‘Triple-I’ indie’s last game cost $200,000. They made back $2,000,000 in sales. But their next game costs $2,500,000. Maybe they make that back also. Maybe they don’t. The money in the bank only gives them 1 or 2 additional swings at bat, not 10.

We now use the term ‘Triple I’ for medium sized teams that had hit games, but we used to call that same spot in the ecosystem ‘midtier developers’. They all died off as markets continued to mature. It becomes increasingly hard to roll a hit every time. In the end, they had no sustainable advantage.

Selling the farm
So not everyone can stay independent. There are three common outcomes for those forced to give up ownership.

Hobbyist: The team becomes a non-commercial endeavour. Either people get a day job and work a few hours at night. Or their family support them. Or they get grants from some institution interested in their work. Or they make games as students and change careers later.

Hire yourself out: The team becomes a contractor to someone with money. This can be via a publishing deal. Or via outright purchase. Or you actually sign a contract to perform specialized labor like porting or multiplayer development. Mega studios love hired help.

Extinction: The team goes out of business. That whole ‘indie’ thing was neat while it lasted.

First frost

You may be curious what winter looks like. Here’s what is coming up for PC, console and mobile.

Consolidation: When a bigger company eats a smaller company..or a smaller company implodes and a bigger company hires their employees, we are seeing something called consolidation. Lots of little studios turn into a smaller number of bigger studios.

Consolidation is a longer term process that will play out over the next 4 to 8 years. These forces don’t apply equally to every team. Some developers earned enough from a hit game they can ride along for many years without confronting their inability to make another hit game. Others are willing to starve for a few years longer before they make any hard decisions. Be patient.

Distribution scarcity: It has already become increasing difficult to get your game in front of new players. The sheer number of games is part of the issue. Also audience capture and advertising cost (see below) limit the general availability of free customers.

Audience capture: The available audience will actually shrink as high value players are locked into long term service-based games like MMOs or other F2P titles. A player doesn't ‘beat’ a game like Clash of Clans; instead they play one game exclusively for years. F2P companies will attempt to stretch the lifetime of their player to decades. These players are no longer looking for a fresh new games so they are typical unavailable to studios making new games or trying to replace churned players.

Majority of studios priced out of buying ads: The ad market sells its inventory to the highest bidder (across a myriad of categories) And for games, the highest bidder is the game with the strongest Life Time Value (LTV). Do you have a high LTV game in a particular category? Great, you can buy ads that juice your player acquisition. If you have a low LTV game (all premium games, most experimental games, most independent games) effective ad-based distribution is priced out of your reach.

Fewer, bigger hits: As the market consolidates around a handful of high value genre leaders, they will earn enormous amounts of money. The downside is that fewer small developers will capture enough sales to stay independent.

Rise of new publishers: Larger organizations with strong marketing and business development can mitigate some of these trends. They also can build portfolios so that if some games fail, successes still keep the whole afloat. That organization usually is called a publisher. Expect a number of publisher to start snapping up contracts for games from the more capable indie developers. Indie developers get cash to offset the risk of their game failing and and publishers get another chance of owning a hit game.

Rise of first party: Longer term platforms will start taking full ownership of any genre that is a guaranteed money maker. This vertical integration pays off. Platforms can capture all revenue that goes through the game, direct players to their games via promotional spotlights and reduce the riskiness of dealing with a volatile 3rd party developer.

Future Springs

We should celebrate the perennials planted during this amazing cycle. Or at least the tulip bulbs that may one day bloom.

Grassroots game development will continue to thrive
I don’t think we’ll ever go back to the bad old days of early 2000 where ‘breaking into the game industry’ was an actual barrier. Several trends mean the flood of new developers will not cease.

Tools: The cost of tools has dropped dramatically. And the tools that exist such as Unreal or Unity are of unprecedented power and polish. Anyone with time and passion can makes games and I suspect it will only get easier.

Schools: Students want to make games. Schools can charge those student enormous fees to teach them how to make games. This dynamic will exist independent of whether or not there are paying jobs waiting for those students.

Open distribution: There are multiple ways to make your game available to knowledgeable players. Steam, Android and iOS stores have minimal gatekeeping. Sites like itch.io have no real gatekeeping. The vast swath of humanity that doesn’t know about your game will never find out about it from these locations, but at least it isn’t blocked from publication. For the hobbyist developer, even a couple dozen downloads from friends and family can be inspiring enough to encourage further game making.

Expect a situation closer to what we see with writers, painters and musicians. Schools enable the necessary but time intensive acquisition of game making skills. The commercial market for those skills remains difficult to break into without elite level portfolios. However, there’s still a vast community of extremely low income developers making games because their passion is stronger than the need to be wealthy. In my dreams, this group of game making hobbyists regularly gets together for wine and moral support. And maybe even funds the occasional indiegogo when one of them needs a new liver.

There will be new markets
VR is one obvious new market. VR isn’t quite able to stand on its own, but platform owners seem committed to market building. If they collaboratively spend a billion or so to seed VR content, that’s a new billion dollar market for game developers.

And VR is not one new market. A rolling wave of multiple VR and AR markets will appear over the next decade as new technology leapfrogs past efforts. Each will be characterized by tech giants engaging in market building. That's an opportunity. Early PC development was likely the most similar sequence. We can have multiple Cambrian explosions.

The seasons turn

I hail from Downeast Maine where growing seasons are short and harvests valued. The spring is a (muddy) revelation. The summer a miracle. Even fall is greeted with a delighted grin. Yes, the wind blows so hard it is hard to walk straight. Yes, the frost will kill our gorgeous garden. But if we’ve planted well, the root cellars are at least full. And we’ve got hot apple cider. And if we haven't, we'll do what we need to do to make it through. Even if that doesn't involve owning our own garden.

The key to my admittedly insipid joy is to realize that the world runs in cycles. We can bemoan the loss of summer, but it does little good. Instead, as winter settles in, put wood in the stove, put on some tea and let the infinite snow silence the cacophony of the world. Take some time to think. What did we do wrong during the last big opportunity? Take some time to dream. What would we do right if we had a chance to grow again? A long term view means that there will be many seasons of growth, harvest and frost.

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About Me

I've been a game designer, pixel artist, toolmaker, physicist and MBA. My first job in college was on a game called Tyrian at a tiny company called Epic Megagames. These days, I'm the Chief Creative Officer at Spry Fox.